Commissioner of Income Tax vs Geo Industries and Insecticides (I) Pvt. Ltd.

N.V. Balasubramanian, J.—The assessee is a company and the original assessment in the case of the assessee for the assessment year

1974-75 was completed u/s 143(3) of the Income Tax Act, 1961 (hereinafter to be referred to as ""the Act""), on September 17, 1975,

determining the total income, after carrying forward the loss relating to the cashew department which was closed during the accounting year

relevant to the assessment year 1972-73. The Commissioner of Income Tax thereafter initiated suo motu revision proceedings u/s 265 of the Act

on the ground that the set off of loss from the defunct cashewnut business against the profit of the business in the manufacture and sale of pesticides

was erroneous. As the entire case depends upon the proper interpretation of the order of the Commissioner, the relevant passage of the order of

the Commissioner is quoted which reads as under ;

. . . the losses of the cashew department and the losses of the hes-sian department (if any) cannot be set off against the profits of the insecticides

department for and from the assessment year 1974-75. Since this has been done the orders were certainly erroneous and they would be

prejudicial to the interests of the Revenue because in the long run, the total income would be reduced. It may be mentioned that the losses in the

cashew department for the assessment year 1971-72 was Rs. 2,90,273 with unabsorbed depreciation of Rs. 9,332. In the circumstances, I shall

set aside the assessments for the years 1974-75 and 1975-76 and direct the Income Tax Officer to make fresh assessments in accordance with

law so as lo exclude the losses of the cashew department and of the hessian department (if any) after giving adequate opportunity to the assessee-

company.

The Income Tax Officer thereafter made a fresh assessment u/s 143 of the Act in pursuance of the directions of the Commissioner of Income

Tax given in the revision. In the said assessment proceedings, the Income Tax Officer accepted the claim that even ignoring the cashew department

loss, there was available loss in pesticides department to be set off against the net profit. However, the assessee made a claim for deduction of a

sum of Rs. 79,000 representing certain damages payment which were disallowed for the assessment year 1976-77 on the ground that it did not

represent the loss of that year, but related to the assessment year prior to 1976-77. The Income Tax Officer rejected the claim of the assessee on

the ground that the Commissioner of Income Tax in the revisional order set aside the order of assessment only for a specific purpose of excluding

the loss from the cashew department and it was not open to the assessee to make a claim for the deduction of Rs. 79,000 in the fresh assessment

made on the basis of the directions of the Commissioner of Income Tax.

The assessee filed an appeal to the Commissioner of Income Tax (Appeals) and the Commissioner of Income Tax (Appeals) held that there is

nothing in law preventing the Income Tax Officer from going through the question of set off of the loss of Rs. 79,000 and he, therefore, directed the

Income Tax Officer to examine the matter on merits for allowance on the damages payment.

The Revenue filed an appeal before the Income Tax Appellate Tribunal and the Tribunal following a decision of this court in the case of

Commissioner of Income Tax Vs. Seth Manicklal Fomra (by L.Rs.), held that when the Income Tax Officer makes a fresh assessment, he has all

powers at the time of making assessment in terms of Section 143(3) of the Act and the Commissioner of Income Tax (Appeals) was justified in

directing the Income Tax Officer to consider the claim of the assessee for deduction of the sum of Rs. 79,000 in the fresh assessment made on the

basis of the directions of the Commissioner of Income Tax. The Revenue has sought for a reference and the Appellate Tribunal has stated a case

and referred the following question of law u/s 256(1) of the Income Tax Act, 1961, for our consideration :

Whether, on the facts and in the circumstance''s of the case, when an order of assessment is set aside u/s 263 of the Income Tax Act, 1961, the

power of the Income Tax Officer to make a fresh assessment is confined to the direction given by the Commissioner ?

Mr. C. V. Rajan, learned counsel for the Revenue, submitted that the jurisdiction of the Income Tax Officer is limited by the order of the

Commissioner of Income Tax and the order of the Commissioner of Income Tax qualified the powers of the Income Tax Officer as he employed

the expression, ""so as to exclude the loss of the cashew department"". He, therefore, submitted that the order of the Commissioner of Income Tax

is qualified and it is limited to consider the loss of cashew department and hessian department and, hence, the provisions of Section 143(3) of the

Act are not applicable. In support of his submissions, he placed reliance on the following decisions : Modi Industries Limited, Modinagar and

Others Vs. Commissioner of Income Tax, Delhi and Another, , (ii) Commissioner of Income Tax Vs. Seth Manicklal Fomra (by L.Rs.), , (iii) Raja

D.V. Seetharamayya Bahadur Vs. Sixth Wealth-tax Officer, , (iv) Commissioner of Income Tax Vs. S.K. Ulagammal Achi, , (v) Faizunnissa

Begam Vs. Assistant Controller of Estate Duty, , (vi) Commissioner of Income Tax Vs. Mansa Ram and Sons, , (vii) Katihar Jute Mills (P.) Ltd.

Vs. Commissioner of Income Tax (Central A), and (ix) Commissioner of Income Tax Vs. Multimetals Ltd., .

Mr. K, Ramagopal, learned counsel for the assessee, on the other hand, submitted that the order of the Commissioner consists of three limbs ;

firstly, the Commissioner set aside the assessment for the assessment year 1974-75, secondly, the Commissioner directed for fresh assessment in

accordance with law and, thirdly, he directed the Income Tax Officer to exclude the loss of cashew department and to give an opportunity to the

assessee. He submitted that the order of the Commissioner is not a restricted one and when the entire assessment is set aside, the Income Tax

Officer was not justified in refusing to consider the claim of the assessee for deduction towards damages payment of the sum of Rs. 79,000. He

submitted that the order of the Commissioner should be read in the light of the principle that there must be a proper and just assessment and when

the direction was to compute the income, no restriction can be placed on the powers of the Income Tax Officer to consider the assessee''s claim

for deduction towards damages payment.

We have carefully considered the rival submissions of learned counsel. u/s 263 of the Act the revisional powers of the Commissioner are wide.

In CIT v. Shree Manjunathesware Packing Products and Camphor Works [1998] 231 ITR 53 , the apex court held that the revisional powers

conferred on the Commissioner u/s 263 are of wide amplitude. The Commissioner u/s 263 of the Act, after examining the records and after making

an enquiry, is empowered to pass such orders as the circumstances of the case would justify and he may pass an order enhancing the assessment ;

he can modify the assessment or he may cancel the assessment and direct a fresh assessment. The Commissioner in the instant case has set aside

the assessment for the years 1974- 75 and 1975-76 and directed the Income Tax Officer to make a fresh assessment in accordance with the law

so as to exclude the losses of the cashew department and hessian department (if any) after giving adequate opportunity to the assessee. The order

of the Commissioner setting aside the assessment and his direction to make a fresh assessment in accordance with the law cannot be read in

isolation, but, it must be read in the context in which the Commissioner has exercised his powers of revision. We have seen on the facts of the case

that all three businesses cannot be regarded as one and it was fairly represented before the Commissioner that the loss incurred by the assessee in

the cashew department and the hessian department cannot be set off against the profits from the insecticides department. The irresistible conclusion

one reaches is that the set off of the loss from the two different and distinct businesses against the profits of other business was not warranted by

the provisions of the law and the direction of the Commissioner to exclude the losses of the cashew department and the hessian department has to

be read along with or coupled with his earlier direction to make a fresh assessment in accordance with the law. In other words, he directed the

Income Tax Officer to make a fresh assessment after excluding the losses in the cashew department and hessian department and, therefore, it is not

permissible for the assessee to pick out one portion of the order of the Commissioner and contend that the order of assessment in its entirety was

set aside. The order of the Commissioner has to be read in the context in which he initiated the revisional proceedings, the order passed in the

revision and his final conclusion.

There are two lines of cases falling on either side of the line. In Commissioner of Income Tax Vs. Seth Manicklal Fomra (by L.Rs.), , this court

held that the powers of the Income Tax Officer to make the assessment are derived under the statutory provisions of Section 143(3) of the Act

and any observation made by the appellate authority in the order of appeal would not bind the Income Tax Officer to consider any other item

which could be the subject-matter of consideration for assessment. The cases falling on the other side of the line are : Commissioner of Income Tax

Vs. S.K. Ulagammal Achi, , Raja D.V. Seetharamayya Bahadur Vs. Sixth Wealth-tax Officer, , Faizunnissa Begam Vs. Assistant Controller of

Estate Duty, , Commissioner of Income Tax Vs. Mansa Ram and Sons, , Katihar Jute Mills (P.) Ltd. Vs. Commissioner of Income Tax (Central

A), and Commissioner of Income Tax Vs. Multimetals Ltd., and they are to the effect that when the assessment is not set aside, the powers of the

Income Tax Officer are limited to those items directed to be considered by the higher authority. But, all the above cases relied on by learned

counsel for both the parties are distinguishable as they are all cases where certain additions have been made by the Income Tax Officer on his own

when he completed the assessment on the basis of directions of the higher authorities. In the instant case, even if we assume that the Commissioner

has not set aside the entire assessment, but set aside the order of the Income Tax Officer in part, even then, the action of the Income Tax Officer to

refuse to consider the claim of the assessee is not legally justifiable.

We are of the view that when the assessee made a claim for consideration of an item for deduction during the course of assessment

proceedings, it is the duty of the Income Tax Officer to examine the claim on the merits of the claim. The present case is not a case where the

assessee made a claim with reference to a matter which was concluded and has become final in the original assessment proceedings, But, on the

other hand, it was found in the subsequent year''s assessment proceedings that the liability of the assessee had accrued when the suit for injunction

filed by the assessee was dismissed by the City Civil Court, Madras, and in view of the subsequent event that the deduction might relate to the

present assessment year, the assessee made a claim for deduction of the damages and when such a claim was made, the Income Tax Officer was

bound to examine the claim on the merits and it is not open to him to reject the claim even at the threshold and refuse to entertain the claim. The

zeal of the Income Tax Officer to carry out the directions of the higher authority may be justified, but at the same time it should not prevent him

from examining the claim of the assessee on the merits. His duty to make an assessment does not begin and end with carrying out the directions of

the Commissioner and his duty is something; more, that is to determine the correct taxable income. We are of the opinion, nothing precludes the

assessee from making a claim before the Income Tax Officer at the time of finalisation of the assessment proceedings and equally nothing prevents

the Income Tax Officer from examining the claim on the merits of the matter. It is well to remember that the assess-ment was being redone by the

Income Tax Officer within four years from the date of the original assessment order and when he is in the process of the completion of the

assessment, he is bound to consider each and every claim preferred by the assessee. Let us imagine a case of a concluded assessment and there

are no pending assessment proceedings, but when the assessee makes a claim for deduction of losses, the Income Tax Officer cannot refuse to

entertain the claim and he may reject the claim on the parameters found in Section 154 of the Act. In the instant case, it is a stronger case for the

assessee as the Income Tax Officer was directed to determine the correct total income of the assessee according to law and during those

proceedings when the assessee makes a claim, the Income Tax Officer is bound to consider the claim of the assessee. We are of the opinion that

while considering such a claim, the question of fulfilment of the conditions for rectification is not a sine qua non and even if the conditions to rectify

the mistakes are not present, the Income Tax Officer, in our opinion, should examine the claim of the assessee on the merits of the case. The

power of the Income Tax Officer to make the assessment as observed by this court in Commissioner of Income Tax Vs. Seth Manicklal Fomra

(by L.Rs.), is derived from the statutory provisions of Section 143(3) of the Act. Though the Supreme Court in the case of Modi Industries

Limited, Modinagar and Others Vs. Commissioner of Income Tax, Delhi and Another, has held that the jurisdiction of the Income Tax Officer is

derived from the order of the Commissioner of Income Tax, his jurisdiction to allow or disallow the carry forward losses of the defunct business

would be derived from the order of the Commissioner, but in other respects and for completing the assessment, his powers would be traceable to

Section 143(3) of the Act. This court in Faizunnissa Begam Vs. Assistant Controller of Estate Duty, has indicated such an approach and it was

held that in so far as other items not considered by the higher authorities are concerned, the power of the Income Tax Officer to reassess the

income would be traceable to the provisions of the statute. Therefore, the refusal of the Income Tax Officer even to consider the claim of the

assessee is not justifiable and we are of the opinion that both the Commissioner of Income Tax (Appeals) and the Appellate Tribunal were right in

directing the Income Tax Officer to consider the claim of the assessee on the merits of the matter. Though we are not agreeing with the view

expressed by the Appellate Tribunal that the entire assessment order was set aside by the Commissioner of Income Tax, still the power of the

Income Tax Officer to consider the claim of the assessee is neither curtailed nor taken away by the order of the Commissioner. The Income Tax

Officer was bound to consider the claim of the assessee u/s 143(3) of the Act when he was in the final process of assessment in the determination

of total income of the assessee as the assessment pursuant to the directions of the Commissioner has not reached the stage of finality. We find that

the Central Board is more liberal in its approach and directed the Income Tax Officer to consider the claim of statutory deduction even when the

assessee has not made such a claim (vide : Circular No. 14 (XL-35) of 1955 dated April 11, 1955-- Chokshi Metal Refinery Vs. Commissioner

of Income Tax, Gujarat-II, . We are of the opinion, such an attitude of the Income Tax Officer would instil confidence in the minds of the taxpayer

that his income would be properly determined and he is not required to pay the tax, neither one paise more nor one paise less than what is

correctly and rightly due in accordance with and under the provisions of the statute. In this view of the matter, we are of the opinion that the order

of the Appellate Tribunal is sustainable in law, though for different reasons stated above.

Accordingly, we answer the question of law referred to us in the affirmative and against the Revenue. The assessee will be entitled to costs of a

sum of Rs. 750.